By Chris Warner
Somewhat earlier than expected, Mr Justice Andrew Smith has provided his judgement in the bank charges test case.
In what must be seen as a victory for consumers, he decided that the Office of Fair Trading (OFT) may assess whether or not unauthorised overdraft charges are fair.
Given the large amounts of money involved, estimated to be up to £3.5bn a year, his decision could have significant consequences for the UK's high street banks.
While the judge made it clear it was not for him to say whether the charges are in fact fair, what is now clear is that unauthorised overdraft fees need to be.
The banks argued that unauthorised overdraft charges could not be assessed by the OFT for fairness because they were fees paid by a customer in exchange for services provided by the bank, and they were explained in the banks' contracts in plain and intelligible language.
The judge disagreed with the banks on the first point - fees for service - but found in their favour on the second.
In doing so, the judge appears to have treated the issues with a great deal of common sense.
Fees for a service
The judge explained that a narrow meaning should be given to the term "fees in exchange for a service" to give full effect to the relevant legislation.
Anything else would risk making the regulations' potential exemptions too wide, and this could undermine the main policy objective of the regulations, which is consumer protection.
If the charges were exempt from assessment then, in effect, the banks could charge an unlimited amount for unauthorised overdraft fees.
The judge then looked at the situation for unpaid item charges (UICs), such as for bounced cheques or rejected standing orders, and decided that no service was provided when such a charge was imposed.
The judge noted there was no obvious benefit provided to the customer in such circumstances, and that the typical customer would not consider he had been provided with a service.
In so finding, the Judge accepted the arguments made by the OFT that the "service" being requested by the customer was the provision of an unauthorised overdraft and not, as the banks had suggested, simply consideration of the customer's request to go into the red.
Paying the price
However, the judge found a different situation applied in relation to paid item charges (PICs).
These are incurred when a customer has their cheque or standing order honoured even though they have gone into the red, and have thus been provided with an overdraft, without prior agreement.
The real question in relation to PICs was, were they the "price" paid in "exchange" for the service provided?
Keeping to his common sense approach, the judge said that this question had to be answered from the position of the typical consumer.
The service provided - at least in the eyes of the typical consumer - is the provision of an overdraft or loan, and the "price" for a loan is usually the interest incurred.
All the banks charge their customers interest on an overdraft, and the interest reflects the amount borrowed and the duration of the overdraft.
So the judge accepted the OFT's arguments that it was interest, and not the PIC, that would be seen as the "price paid in exchange for the service".
The judge also noted that for most of the banks, the amount of their PICs and UICs were identical or at least very similar.
But given that an overdraft is provided in one circumstance but not the other, it suggested that the charges were not really being levied for the provision of the overdraft.
Plain intelligible language
The OFT argued that for the banks' contracts to be in plain and intelligible language, it was necessary that they explained everything the customer would need to know about the operation of his account.
The banks disagreed, arguing that it simply meant the words on the page had to be easy to understand.
The judge agreed with the banks: a customer did not need "an education in the full complexities of banking systems".
Instead, he needed to know when he would be charged, and what that charge could be.
The judge then looked at the "seven uncertainties" common to the banks' contracts as identified by the OFT.
Taking each of the banks' contracts in turn, the judge dismissed the OFT's arguments, finding that in all but in a few limited respects, those contracts were in plain intelligible language.
Given the banks lost on the first issue, their win in relation to plain intelligible language does, at first glance, seem largely devoid of significance.
However, it may not be.
In particular, I wonder whether it might prove to be a slight sting in the tail for the OFT as it undertakes its fairness assessment.
It is a necessary precondition to any finding of unfairness under the Regulations that the relevant terms are "contrary to the requirement of good faith".
The banks have argued that in this context "good faith" means fair and open dealing with their customers.
If the banks are right, then the fact that their contracts are in plain intelligible language would appear to give them the upper hand.
However, there is clearly more to ensuring consumers are not surprised by their contracts than making sure the long contractual documents are easy to understand.
Either way, the issue of good faith is certain to be a critical aspect of this saga over the next few months and may well be where the banks focus their attention - unless they appeal, that is.
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